No. 84-78 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1985 

WILLIAM R. McGREGOR and LINDA KEENER 

McGREGOR, d/b/a McGREGOR SERVICE, 

Plaintiffs and Respondents, 

HOPE CUSHYJIN MOMMER and THE ESTATE OF 

PAUL CUSHMAN, 

Defendants and Appellants. 

APPEAL FROM: District Court of the Fifth Judicial District, 

In and for the County of Madison, 

The Honorable Mark Sullivan, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Johnson, Skakles & Kebe; Greg J. Skakles argued, 

Anaconda, Montana 

For Respondent: 

Poore, Roth, & Robinson; Donald Robinson argued, 

Butte, Montana 

Submitted: March 28, 1985 

Decided: February 6, 1986 
Mr. Justice L. C. Gulbrandson delivered the Opinion of the 

Court. 

The defendants appeal following a four day jury trial 

completed on October 10, 1983, in the District Court of the 

Fifth Judicial District, Madison County, Montana. They 

appeal from the District Court's denial of their motions for 

directed verdict; from the judgment entered in accordance 

with the jury verdict; and from the District Court's order 

awarding attorney fees to plaintiffs. We reverse the 

judgment and remand for a new trial. 

Hope Cushman (now Hope Cushman Mommer) and Paul Cushman 

(now deceased) , defendants and appellants, (hereinafter 

referred to as Cushmans) , bought a gas station in Twin 

Bridges, Montana in 1955. In 1970 they expanded by adding a 

wholesale operation to serve ranches in the area. This 

expansion required. building a loading dock and warehouse; 

insta-lling four 10,000 gallon storage tanks and tanks for 

customers; and buying a bulk truck to make deliveries. Paul 

Cushman also began having health problems in 1970. In 

September 1975 he suffered a heart attack and the doctor 

advised him to sell the business because of his limited life 

expectancy. They listed the property with a number of 

realtors in 1976, asking $158,000. 

Bill McGregor was looking for employment at the time he 

hea.rd the Cushmans' station was for sale. He contacted Paul 

Cushman and set up a meeting for April 1977. McGregor was 

interested in the station both because of the location (his 

wife taught in the Twin Bridges school system) and because he 

anticipated the family farm where he worked would be sold 

when his father retired. 
At their first meeting McGregor received a prospectus 

Mrs. Cushman had prepared in 1976 for the various realtors. 

She had prepared the prospectus in order to give potential 

buyers an understanding of the business. It contained the 

reason the property was offered for sale, a description of 

the property and inventory and a list of customers, as well 

as the following statements: 

I know of no ranch that would give 

receipts like this business. 

Net 

&X+SG for 1974 was: $35,410.71 

Net 

eees for 1975 was: $42,803.15 

Mrs. Cushman changed the word "Gross" to "Net" for both 

1974 and 1975 only on the copy of the prospectus given to 

McGregor and pointed out to McGregor that these changes were 

correct. The net profit of the business had averaged $9,368 

for 1974 and 1975. The net for 1976 was $6,183 and there was 

a loss of $9,996 in the first five months of 1977. The 

average net profit for 1972-76 was less than $3,300 per year. 

The prospectus listed the gross profit (gross income less 

cost of goods sold) for 1974 and 1975. 

McGregor asked the Cushmans to provide more information 

to support the figures in the prospectus. Mrs. Cushman 

responded saying she would get the figures from her son for a. 

later meeting. At the third meeting she gave McGregor 

documents each entitled "Financial Statement" for 1974 and 

1975 that concluded with the same figures as in the 

prospectus and showed double underlines under those figures. 

These documents did not include operating expenses. Bill 

Cushman, the Cushmans' son, attended the fourth meeting 

between Cushmans and McGregor in late April 1977. He had a 
degree in accounting and testifed that he thought McGregor 

was not sophisticated in accounting and in dealing with 

financial statements; that he did not volunteer information 

about the business although he was available for questions; 

that the full financial statements and other documents were 

lying on the table at that meeting; and that the prospectus 

was misleading. McGregorls background was limited to two 

basic accounting courses taken during his first year of 

college. He testified that he understood the figures on the 

prospectus to represent net income. 

The prospectus also included the following statement 

about one of the customers: 

. the one at Nevada City is 

exceptionally good for summer time 

tourist trade. Also this station is the 

only one to serve Va. city at this time 

during the winter. 

This station took its last delivery on April 20, 1977 and 

closed on April 30, 1977. Cushmansl employee attended a 

going away party for the station owner on May 1, 1977. Until 

the closure, this station had taken deliveries about every 

6-7 days and represented 35% of Cushmans' total receipts. 

They did not inform McGregor tha.t this customer would no 

longer be available. 

The following statement was also in the prospectus: 

To increase my gallonage, I also run my 

cash wholesale customers thru the station 

and still make a larger profit (on rent 

paid by Phillips paid on station 

gallonage each month.) Total: per gallon 

doing it this way is 6.18C profit. 

This profit is termed "A-G rental payment." The Cushmans had 

done this while running the business. However, this was not 

permitted by the Phillips Company and Phillips would have 

terminated the contract if they had known of the practice. 
The Cushmans operated the station a.s "consignees" 

rather than "jobbers" and recommended McGregor do the same. 

A consignee required less operating capital and Phillips 

carried the agricultural wholesale customer accounts on a 

nine-month interest free credit basis rather than requiring 

the station operator to carry these accounts. A jobber had a 

slightly higher profit margin on sales than a consignee and 

paid for the product as it was purchased from Phillips rather 

than as it was sold to station customers. McGregor met with 

a Phillips representative twice prior to entering the 

purchase agreement. Neither Phillips nor the Cushmans told 

McGregor that he would not be given a consignee contract and 

would have to take a jobber contract if he wanted to be 

affiliated with Phillips. 

McGregor paid $2,000 as earnest money towards purchase 

of the Cushmans' business. By this time he had received an 

appraisal of $65,300 for the land, buildings, storage tanks 

and dock. This did not include the truck, wrecker, hand 

tools or inventory. At an inventory taken with McGregor 

present, the total value assigned to the merchandise was 

$27,200. The Cushmans respresented the inventory as 

saleable. McGregor determined that about $2,000 worth was 

out of date and unsaleable when, after a couple of years, the 

tires and other parts did not sell. 

On June 7, 1977, McGregor and Cushmans entered into a 

contract where McGregor would pay $120,000 for the business 

excluding inventory. He made a down payment of $34,800 and 

made the required monthly payments of $814.51 through 

November 1981. McGregorls total payments to the Cushmans 

were $78,323.84. He purchased the inventory separately for 

$27,000. 
McGregor operated the business so that the gross 

gallonage sold greatly increased each year. By 1980 his 

gross sales were over five times Cushmans' best year. 

However, he had difficulty maintaining an adequate cash flow 

throughout this period. The two main reasons for his cash 

flow problems were the debt service to Cushmans and the extra 

capital requirements needed for operation as a jobber rather 

than a consignee. 

McGregor discovered that the figures in the prospectus 

were gross income rather than net income after speaking with 

a hank officer in late summer or early fall of 1981. The 

officer told him there was "no future" in the business so he 

went back to the information provided by the Cushmans to 

analyze and compare with his figures. At that time he 

realized the prospectus showed gross profit. He and a 

Phillips representative had discussions with the Cushmans in 

an effort to keep the business going but they did not reach 

an agreement. McGregor, during this time, traded in the 

truck used to make bulk deliveries and purchased a newer 

model. He later sold that truck and closed the wholesale 

operation. Jn addition he leased the service station out to 

another person. 

McGregors filed their complaint against the Cushmans on 

June 22, 1982 seeking rescission of the purchase and sale 

contract for the retail and wholesale gasoline business and a 

return of monies paid pursuant to that agreement. The 

grounds for relief alleged were fraud through misrepresentation, undue influence, and failure of consideration. The 

alternative prayer for relief requested an order that Hope 

Cushman execute a warranty deed and bill of sale to the 

McGregors for the property. The McGregors also requested 
general damages and attorneys' fees. The defendants 

counter-claimed requesting payment of amounts owed under the 

contract or a return of the property and damages sufficient 

to return the property to the condition at the time of sale. 

They also raised defenses of waiver, estoppel and laches. 

The trial was scheduled to begin October 4, 1983. In 

the pre-trial order the McGregors included a request for 

damages because of lost interest and mental distress and 

alleged that the Cushmans' conduct violated a duty of good 

faith and fair dealing. The Cushmans' motion to prevent 

presentation of evidence on the new damages as not 

specifically pleaded and inappropriate was denied. The 

jury's verdict, by way of special interrogatory, found actual 

damages of $78,323 and mental anguish damages of $5,000 for 

the McGregors, and awarded the Cushmans an offset of $9,000. 

Pursuant to post-trial motions, the trial judge awarded 

attorneys' fees of $20,032.78 and costs of $294.49 to the 

McGregors and denied deposition costs. 

The issues on appeal are: 

(1) Was there a sufficient factual dispute for the 

District Court to deny Cushmans' motions for a directed 

verdict and allow the case to be submitted to the jury? 

(2) Is recission available as a remedy to McGregors? 

(3) Did the District Court correctly instruct the jury 

on the implied covenant of good faith and fair dealing? 

(4) Did the District Court err when it submitted the 

question of constructive fraud to the jury? 

(5) Do the doctrines of estoppel and waiver defeat 

McGregors' claims as a matter of law? 

(6) Did the District Court correctly refuse two of 

Cushmans' offered jury instructions on defenses? 
(7) Did the District Court correctly allow testimony 

on mental distress and lost interest as part of McGregors' 

damages? 

(8) Did the District Court correctly award costs and 

attorneys' fees to McGregors on the basis of the contract? 

(9) Does the contract provision include the payment of 

attorneys' fees on appeal? 

In the first issue, the defendants argue that their 

motions for directed verdict, made at the conclusions of 

plaintiffs' and their own cases, were improperly denied 

because there was insufficient evidence to allow recovery 

under the theory of actu81 fraud. 

"Motions for directed verdict or for 

judgment N.O.V. are proper only when 

there is a complete absence of any 

evidence to warrant submission to a jury. 

In this regard evidence and all 

inferences must be considered in the 

light most favorable to the party 

opposing directed verdict . . . " 

(Citations omitted.) 

Jacques v. Montana National Guard (1982), 199 Mont. 493, 504, 

649 P.2d 1319, 1325, quoting Karczewski v. Ford Motor Company 

(N.D. Ind. 1974), 382 F.Supp. 1346, 1348, aff'd. (7th Cir. 

It would have been error to direct a verdict for 

defendants if plaintiffs submitted sufficient evidence of 

actual fraud at trial to make out a prima facie case, since 

actual fraud is a question of fact for the jury. Healy v. 

Ginoff (1923), 69 Mont. 116, 220 P. 539. The elements of 

actual fraud are: 

1. A representation; 

2. Falsity of the representation; 

3. Materiality of the representation; 

4. Speaker's knowledge of the falsity of 

the representation or ignorance of its 

truth; 
5. Speaker's intent that it be relied 

upon; 

6. The hearer's ignorance of the falsity 

of the representation; 

7. The hearer's reliance on the 

representation; 

8. The hea.rerls right to rely on the 

representation; and 

9. Consequent and proximate injury caused 

by the reliance on the representation. 

(Citations omitted.) 

Van Ettinger v. Pappin (1978), 180 Mont. 1, 10, 588 P.2d 988, 

Defendants contend that plaintiffs' evidence was 

insufficient to establish a false representation or 

justifiable reliance on the representation. Defendants argue 

that they made no representations as to net income and even 

if plaintiffs could show false statements on net income, 

consignee status, legality of A-G rental payments, and the 

closure of the Nevada City station, plaintiffs cannot 

demonstrate justifiable reliance on those statements. The 

prospectus contained "Net" figures und.er a statement 

favorably comparing the "Net" to the receipts from a ranch. 

The financial records Cushmans gave McGregor included 

statements with these same figures. Bill Cushman testified 

at trial that the financial statements would be misleading to 

someone not knowledgeable in accounting. A jury could find 

false representations were made on this evidence. 

Further, the jury had sufficient evidence to find 

McGregor reasonably relied on the representations. A 

seller's superior knowledge of the financial condition of a 

business is a factor in determining a purchaser's right to 

rely on the seller's representations about that financial 

condition. Bails v. Gar (1976), 171 Mont. 342, 349, 558 P.2d 

458, 462. Cushmans, as owners and operators of the business, 

had knowledge superior to McGregor's about the past income 
and profits of the business. Even assuming McGregor should 

have investigated the statements and ascertained their truth 

or falsity, he is only required to use reasonable diligence 

and whether he did so is another factual question for the 

jury. McGregor questioned Cushmans, talked to the Phillips' 

representative and received an appraisal of the business. 

The jury had sufficient evidence to find that McGregor 

adequately investigated the business and reasona-bly relied on 

Cushmans' representations. We find no error in the District 

Court's failure to direct a verdict for defendants on the 

claim of actual fraud. 

In the second issue, defendants argue that rescission 

was not available as a remedy to the plaintiffs because they 

sold or disposed of the wholesale operations and could not 

return this important part of the business as required by 

rescission. Section 28-2-1713 (2) , MCA, states that the 

rescinding party "must restore to the other party everything 

of value which he has received from him under the contract or 

must offer to restore the same, upon condition that such 

party shall do likewise, unless the latter is unable or 

positively refuses to do so." Section 28-2-1716, MCA, states 

that " . . . the court may require the party to whom 

[rescission] is granted to make any compensation or 

restoration to the other which justice may require." When 

this Court considered the requirement of restoration in 

OIKeefe v. Routledge (1940), 110 Mont. 138, 103 P.2d 307, we 

recognized the matter as one of equity and quoted the 

Kentucky Court in Black Motor Co. v. Green (1934), 79 S.W.2d 

409, 411: 

"An absolute and literal restoration of 

the parties to their former condition" is 

not required; it is "sufficient if such 
restoration be made as is reasonably 

possible and such as the merits of the 

case demand." 

110 Mont. at 146-147, 103 P.2d at 310. Where circumsta.nces 

have changed so that complete rescission is not possible, 

" [tlhe trial judge must use his discretion in doing equity, 

and this Court will not reverse that decision short of a 

showing of abuse of that discretion." Scott v. Hjelm (1980), 

188 Mont. 375, 380, 613 P.2d 1385, 1387-1388. The record on 

appeal reflects no abuse of discretion. The trial judge 

acted properly in permitting the jury to consider rescission. 

We hold that, under these circumstances, plaintiffs' 

inability to completely restore defendants to their original 

condition, alone, would not foreclose rescission as a remedy. 

Section 28-2-1713 (I), MCA, requires a party use 

reasonable diligence to "rescind promptly upon discovering 

the facts which entitle him to rescind . . . The element 

of promptness corresponds with the defense of laches. 

"Laches is negligence in the assertion of a right. It exists 

when there has been an unexplained delay of such duration or 

character as to render the enforcement of an asserted right 

inequitable." Brabender v. Kit Manufacturing Co. (1977), 174 

Mont. 63, 67-68, 568 P.2d 547, 549. In Brabender, the 

plaintiffs purchased a mobile home from the defendants and 

took delivery in November 1971. Four days later they 

complained about the condition of the home and stated they 

would not accept it, but refused to let defendants make any 

repairs. The plaintiffs later paid all scheduled 

installments due on the contract for purchase and continued 

to live in the home intermittently until May 1973. There 

were no further communications between the parties until 

plaintiffs filed suit in February 1976 seeking rescission or 
in the alternative, damages. We held that the plaintiffs' 

suit for rescission was barred by laches and their suit for 

damages was barred by the applicable four year statute of 

limitations. 

" . . . Under ordinary circumstances, a 

suit in equity will not be stayed for 

laches before, and will be stayed after, 

the time fixed by the analogous statute, 

but if unusual conditions or 

extraordinary circumstances make it 

inequitable to allow the prosecution of a 

suit after a briefer, or to forbid its 

maintenance after a longer, period than 

that fixed by the analogous statute, a 

court of equity will not be bound by the 

statute, but will determine the 

extraordinary case in accordance with the 

equities which condition it. When a suit 

is brought within the time fixed by the 

analogous statute, the burden is on the 

defendant to show, either from the face 

of the complaint or by his answer, that 

extraordinary circumstances exist which 

require the application of the doctrine 

of laches. On the other hand, when the 

suit 48 brought after the statutory time 

has elapsed, the burden is on the 

complainant to aver and prove 

circumstances making it inequitable to 

apply laches to his case." 

Brabender, 174 Mont. at 63, 568 P.2d at 550, quoting Shell v. 

Strong (10th Cir. 19451, 151 F.2d 909, 911. . . 

The defendants here did not plead, nor do they argue 

on appeal, that any statute of limitations bars plaintiffs' 

claims. The two-year statute of limitations for fraud acts 

as an aid in determining whether the delay in the assertion 

of plaintiffs' claims, along with any other circumstances, so 

prejudiced the defendant that laches should bar the remedy of 

rescission. The plaintiffs had notice of circumstances that 

should have put them on inquiry of possible fraud at the time 

of sale and in 1978 when the net income did not reflect the 

earlier representations. Defendants point out that the 

plaintiffs, as early as August 1977, were aware that the 
wholesale customer in Nevada City had closed, that a 

consignee contract was not available and that A-G rental was 

not available. In his testimony, McGregor stated that in 

1978 he knew he was not realizing the expected net income. 

He had the benefit of financial statements at the close of 

each year. This information was sufficient to put him on 

inquiry, thus the knowledge of misrepresentations and fraud 

will be imputed to him. Lasby v. Burgess (1930), 88 Mont. 

49, 62-63, 289 P. 1028, 1032. Nevertheless, the plaintiff 

continued to make payments and operate the business without 

complaint until about November 1981. These facts constitute 

laches, or a failure to use reasonable diligence to rescind 

promptly on the part of the plaintiffs. Therefore, we hold 

the District Court erred in permitting the jury to consider 

rescission as a remedy for the plaintiffs. 

The District Court instructed the jury on the implied 

covenant of good faith and fair dealing. In ruling on 

objections to the instructions, the court stated that they 

defined the duty required for an allegation of constructive 

fraud. Defendants argue on appeal that the implied covenant 

has no application in a case involving an arms-length 

contract. Plaintiffs argue that defendants had a duty to 

disclose the true profitability of the business after making 

misleading statements, and that a breach of this duty was a 

breach of the implied covenant of good faith and fair 

dealing. 

We recently discussed the implied covenant of good 

faith and fair dealing in Nicholson v. United Pacific 

Insurance Co. (Mont. 1985) , P.2d , 42 St.Rep. 1822. 

There, in upholding a damage award for a breach of this 

implied covenant, we stated: 
Nicholson, 

The nature and extent of an implied 

covenant of good faith and fair dealing 

is measured in a particular contract by 

the justifiable expectations of the 

parties. Where one party acts 

arbitrarily, capriciously or 

unreasonably, that conduct exceeds the 

justifiable expectations of the second 

party. The second party then should be 

compensated for damages resulting from 

the other's culpable conduct. 

, 42 St.Rep. at 1829. A breach 

of this implied covenant which results in damages can thus 

give rise to an action in tort. In order to recover punitive 

damages, in addition to any recovery for the tort, plaintiffs 

must prove that defendants' actions in breaching the implied 

covenant of good faith and fair dealing met the requirements 

of 5 27-1-221, MCA. Nicholson, P.2d , 42 St.Rep. at 

The jury instructions given in the case at bar stated 

that good faith means honesty in fact in the conduct or 

transaction concerned, apparently taken from the Uniform 

Commercial Code, $ 30-1-201(19), MCA, and then equated the 

implied covenant to an obligation imposed by law on 

defendants to do nothing to deprive plaintiffs of the 

benefits of their commercial transaction. The tort of breach 

of the implied covenant of good faith and fair dealing, as 

defined in Nicholson, requires more than a lack of "honesty 

in fact." As discussed above, it requires, at a minimum, 

that defendants ' actions were arbitrary, capricious or 

unreasonable and exceeded plaintiffs' justifiable 

expectations. We hold that the instructions given to the 

jury on this issue inadequately defined the tort. 

The fourth issue concerns whether the jury should have 

been permitted to consider recovery on a theory of 

constructive fraud. Section 28-2-406 (1) , MCA, defines 
constructive fraud as "any breach of duty which, without 

fraudulent intent, gains an advantage to the person in 

fault. . . by misleading another to his prejudice . . . " 

Contrary to defendants' contentions, no fiduciary or 

confidential relationship need exist between the parties to 

justify a finding of constructive fraud. Mends v. Dykstra 

(1981), 195 Mont. 440, 449-450, 637 P.2d 502, 507-508. Where 

sellers, by words or conduct, create a false impression 

concerning serious impairments or other important matters and 

subsequently fail to disclose the relevant facts, 

constructive fraud may be found. Moschelle v. Hulse (Mont. 

1980), 622 P.2d 155, 159, 37 St.Rep. 1506, 1510. In 

Moschelle, the sellers made misleading statements about the 

rotting floor and foundation of the buildings, the wiring, 

the sewer lines and the seasonal flooding in the basement. 

They told the buyers that income from the business would 

cover payments under the purchase contract and the buyers' 

living expenses. This Court relied on the "pattern of 

repeated concealments," the buyers' inability to discover the 

true condition of the premises and profitability of the 

business, and the buyers' lack of experience. 622 P. 2d at 

159, 37 St.Rep. at 1510. In the case at bar, defendants made 

general statements about the profitability of the business in 

addition to the figures in the prospectus and the financial 

statements. Plaintiffs claimed other facts were 

misrepresented as well. When viewing this evidence most 

favorably for the plaintiffs, Jacques, 199 Mont. at 504, 649 

P.2d at 1325, the District Court did not err by submitting 

the question of constructive fraud to the jury. 
Defendants also question the special verdict's 

reference to constructive fraud. Since this case is 

remanded, we need not address this topic. 

The defendants contend that waiver and estoppel operate 

to bar any relief to the plaintiffs as a matter of law. 

Waiver is the voluntary, intentional relinquishment of a 

right. Kelly v. Lovejoy (1977), 172 Mont. 516, 520, 565 P.2d 

321, 324. A waiver of a right of action will be declared 

only when the party clearly manifests such an intention. 

Koch v. Rhodes (1920), 57 Mont. 447, 458-459, 188 P. 933, 

937, cited in Falls Sand and Gravel Co. v. Western Concrete 

(Mont. 1967), 270 F.Supp. 495, 501. The presence of 

voluntariness and the requisite intent are necessarily 

questions of fact. Consequently, we hold that the District 

Court did not err by presenting the issue of waiver by 

plaintiffs to the jury. 

The doctrine of estoppel, to successfully prevent the 

assertion of a claim of fraud, requires knowledge of the 

fraud at the time of the execution of the contract. 37 

Arn.Jur.2df Fraud and Deceit, $386. In Montana, we have held 

that estoppel "has no application where the omissions of the 

party claiming estoppel brought about the problem." 

Carroccia v. Todd (Mont. 1980), 615 P.2d 225, 228, 37 St.Rep. 

1437, 1440; and First Sec. Bank of Bozeman v. Goddard (1979), 

181 Mont. 407, 593 P.2d 1040. The evidence presented in this 

case indicates the plaintiffs did not have full knowledge of 

the claimed fraudulent acts at the time they entered the 

contract. Further, the defendants' misrepresentations and 

failure to disclose brought about the problem. The District 

Court correctly refused to instruct the jury on estoppel as 

requested by the defendants. 
The District Court's refusal to give two of the 

instructions on defenses offered by the defendants forms the 

basis of the sixth issue. One concerned the elements of 

estoppel, properly refused for the reason stated above. The 

second stated: "Regardless of the falsity of statements, a 

party is estopped from recovery if there is a long continued 

silence and failure to raise objections," citing Kelly, 172 

Mont. at 520, 565 P.2d at 324. In Kelly, this Court held 

that the plaintiffs, by acquiescing in the presence of 

horses, waived their right to enforce a restrictive covenant 

prohibiting livestock. Kelly did not concern false statements 

by a party, nor did it concern a long continued silence. The 

use of "estopped," both in Kelly and in the instruction, was 

confusing in that the issue under discussion was waiver 

rather than estoppel. We note also that defendants offered 

no instructions which would explain the word "estopped" as 

used in that context. The District Court did not err under 

these circumstances when it refused to give this instruction. 

The seventh issue concerns plaintiffs' requested. 

damages for loss of interest and mental and emotional 

distress in addition to recission. 

On rescission of a contract, the court 

will, where necessary to effect complete 

justice, award to the party not in 

default his expenses necessarily incident 

to the contract. 

17 Arn.Jur.2d1 Contracts, $519. In Silvast v. Asplund (1935), 

99 Mont. 152, 42 P.2d 452, this Court permitted an award for 

lost interest in addition to rescission. The historical 

reason for not permitting both rescission and damages is that 

a party may receive a double recovery. In this case the jury 

was instructed "[Tlhat you are not allowed to award damages 

which would in effect allow a double recovery." A recovery 
of lost interest would not duplicate any recovery plaintiffs 

might have received through rescission in this case. 

Therefore, we hold that the District Court did not err by 

allowing the jury to consider this item of damages. 

One jury instruction stated that if they found for the 

plaintiffs, they "must award them damages for all emotional 

distress and mental anguish suffered as a result of the 

Defendants' conduct. " (Emphasis added. ) This instruction, 

in effect, directs a verdict on damages for emotional 

distress even if plaintiffs recovered only on their contract 

claim. 

As this Court stated in Johnson v. Supersave Markets, 

Inc. (Mont. 1984), 686 P.2dI 209, 41 St.Rep. 1495: 

We agree with the Oregon court's 

conclusion: "We do not yet live, however, 

in an 'eggshell society' in which every 

harm to property interests gives rise to 

a right of action for mental 

distress . . . " 

In determining whether the distress is 

compensable absent a showing of physical 

or mental injury, we will look to whether 

tortious conduct results in a substantial 

invasion of a legally protected interest 

and causes a significant impact upon the 

person of plaintiff. (Emphasis in 

original.) (Citations omitted.) 

686 P.2d at 213, 41 St.Rep. at 1500. In Johnson, the 

plaintiff had been improperly arrested and testimony from at 

least one witness showed he had suffered "devastating 

emotional impact" from the tortious conduct. 686 P.2d at 

213, 41 St.Rep. at 1500. Although McGregor testified that 

his financial problems bothered him a lot and "at times, it 

would show up at home," the record reflects no serious 

emotional distress or anxiety as required by the holding in 

Johnson, supra. We hold that this instruction improperly 
required the jury to award damages for emotional distress and 

mental anguish without finding a significant impact on the 

plaintiff. 

In addition, plaintiffs claim that the award for mental 

anguish and distress was proper as a result of defendants1 

breach of the implied covenant of good faith and fair 

dealing. As stated above, the jury was not properly 

instructed on this tort. Thus, the award of damages for 

mental anguish and distress must be reversed on this basis as 

well. 

The two final issues on this appeal question the award 

of costs and attorneys1 fees to the prevailing party. Our 

decision in this case renders these issues moot. 

Reversed and remanded for a new trial. 

We concur: / 

Chief Justice 

Justices 
Mr. Justice John C. Sheehy, dissenting: 

I dissent.. 

L would affirm the decision of the District Court in 

this case, especially because after remand and a further 

trial, it appears to me that the results will be about the 

sanie. 

Ny interpretation of the majority opinion is that it 

does the following things: (1) denies recovery for 

rescission because of laches; (2) permits recovery for 

breach of contract; (3) permits recovery for cc~nstructive 

fraud; (4) 6enies recovery For a breach of the implied 

covenant of good faith; and (5) denies recovery for 

attorneys fees. 

On remand, the cause will be subrritted in a new trial on 

issues of breach of contract and constructive fraud. A 

breach of contract action of course, sounds in contract. Cn 

the other hand, a constructive fraud action sounds in tort. 

Whether in contract or in tort, the McGregors should be able 

to recover their payments to the Cushmans in the sum of 

$78,323. That amount was awarded in the first trial. In 

addition, because constructive fraud is also a basis for 

recovery, the rules relating to tort damages apply. In 

Gibson v. Western Fire Insurance Company (Mont. 19841, 682 

P.2d 725, 41 St.Rep. 1048, we held that the statutory 

allowance for recovery of darriages in tort cases, for all 

detriment proximat.ely causd by a tortfeasor, would ellow 

recovery for amounts other than simply the amount of the 

actual 6amages, as for example economic loss and emotional 

distress. Gibson v. Western Fire Insurance Company was, of 

course, a bad faith action. However, by analogy, since 
Gibson defined the elements of damages j.n tort cases, we 

would eventual-ly hold that emotional distress is an element 

of recovery in proper cases for damages in tort, which would. 

include a constructive fraud ca-se. 

It is clear to me, that in making the representation 

respecting net prof it, Cushnians were guilty of at least 

constructive fraud, if not actual fraud. It appears to me 

that a new trial will result in at least the same amount of 

da~ages as were awarde2. earlier and that renand for retrial 

in this case is a waste cf judicial resources, an2 an unfair 

impositi-on upon a plaintiff who has the right to recover. 

Therefore, I would affirm. 

;7 

LI'LZy (, \ , ) ,(,(,vr,~ ! 

Justice 
Mr. Justice Frank B. Morrison, Jr., dissenting: 

The majority opinion finds error in (1) granting rescission; (2) submitting an instruction on the implied covenant 

of good faith and fair dealing; (3) awarding damages for 

severe mental and emotional distress. The jury did not 

decide the rescission question. The court granted a rescission in the judgment but any relief granted for rescission 

has no effect upon the jury award for damages in the tort 

case. They are separate matters. I only dissent to the 

granting of a new jury trial on the damage question. It is 

not necessary to discuss the $5,000 award for mental distress 

as that could be simply stricken if the majority deems the 

evidence insufficient for submission on that issue. The 

question on mental and emotional distress is a close one and 

I would not be adverse to striking that $5,000 award from the 

verdict. I strongly oppose granting a new trial as there is 

clearly no basis for granting same. 

The majority grants a new trial on the basis of the 

court having given instruction no. 24. That instruction 

stated: 

You are instructed that Hope and Paul 

Cushman owed William and Linda McGregor 

an implied-in-law duty of good faith and 

fair dealing that they would do nothing 

to deprive the plaintiff of the benefits 

of the commercial transaction between the 

parties. The duties or obligations 

arising from the purchase and sale agreement between the parties imposed an 

obligation of good faith in the negotiations, performance, and enforcement of 

those duties and obligations. Good faith 

is defined as honesty in fact in the 

conduct or transaction concerned. If you 

find that the defendants violated this 

obligation imposed by law, the plaintiffs 

are entitled to be compensated for all 

the detriment or injury proximately 

caused thereby whether that detriment or 

injury could be anticipated or not. 
This instruction was given prior to our decision in 

Nicholson v. United Pacific Insurance Co. (Mont. 1985) , 

P.2d , 42 St.Rep. 1822. The instruction here given is, 

in my opinion, better than the one given in the Nicholson 

case. However, the instruction there given was tendered by 

the defense and therefore could not be objected to by the 

defendant on appeal. 

In Nicholson, the Court did not wish to bless the instruction given but did, for the first time, articulate the 

following rule : 

The nature and extent of an implied 

covenant of good faith in fair dealing is 

measured in a particular contract by the 

justifiable expectations of the parties. 

Where one party acts arbitrarily, capriciously or unreasonably, that conduct 

exceeds the justifiable expectations of 

the second party. The second party then 

should be compensated for damages resulting from the others culpable conduct. 

The instruction given by the court in the case at bar is 

more restrictive than the new rule articulated by the court 

in Nicholson. The two rules are similar in many respects. 

However, the conduct referred to in instruction no. 24 contemplates that the duties and obligations arising from the 

purchase and sale agreement be breached in a dishonest way by 

one of the contracting parties for a cause of action to arise 

under "implied-in-law duty of good faith and fair dealing. " 

The standard articulated in Nicholson is broader in that the 

reasonable expectation of the parties can be breached by 

arbitrary, capricious and unreasonable conduct. In other 

words, under the standard adopted by this Court in Nicholson, 

one can incur liability for breach of the covenant where one 

acts negligently. The instruction given by the District 

Court in this case would appear to require that the 
contracting parties act honestly and only if they fail in 

that regard, is there a remedy. 

The majority's insistence on reversing the verdict in 

this case based upon the giving of instruction no. 24 j.s 

appalling. Not only was the instruction narrower than the 

one approved in Nicholson, but the duty of good faith and 

fair dealing was not even submitted to the jury in the verdict form. The following excerpt is taken from the "special 

verdict" : 

ISSUE NO. 1 

(The burden of getting a "yes" answer is 

on the plaintiffs. ) 

Have the plaintiffs proven by a prepond-erance of the evidence that defendants 

engaged in actual or constructive fraud 

in the course of the transactions and 

dealings between the parties that led to 

the consummation of a contract between 

them on June 7, 1977? 

X YES 

If your answer t-o the preceding issue is 

"yes," then please answer the following 

issue no. 2; if your answer to the preceding issue is "no," then please proceed 

to answer issue no. 4. 

The jury was not asked about the implied covenant of 

good faith and fair dealing. They found fraud. They were 

properly instructed on both constructive fraud and actual 

fraud. The jury then, in issue no. 3, found the amount of 

actual damages to be $78,323, the amount of mental anguish to 

he $5,000, and awarded an offset of $9,000. Judgment was 

thereupon entered by the District Court in accordance with 

the jury verdict. It is cl-ear that the jury made no findings 

with reference to the implied covenant of good faith and fair 

d-ealing and the giving of instruction no. 24 could in no way 

have created reversible error, 
We recently decided the case of Martin J. Kleinsasser v. 

Superior Derrick Service, Inc., et al. (Mont. 1985), 708 P.2d 

568, 42 St.Rep. 1662. The case was determined by a 

five-judge panel consisting of Chief Justice Turnage, Justices Gulbrandson, Hunt, Morrison and Sheehy. Justice Sheehy 

dissented. In that case, the issue here involved was presented four square. Plaintiff contended that the instructions given on strict liability were incomplete and 

misleading. Indeed, court's instruction no. 16 was most 

incomplete in its attempt to define strict liability. However, the jury, in a special verdict form, was only submitted 

the negligence theory. The jury found no negligence. Strict 

liability was not submitted to the jury although the court 

gave incomplete instructions on strict liability. In that 

case, the majority said: 

Plaintiff contends that the instructions 

given on strict liability offer an incomplete and misleading statement of the 

law. Any error alleged is harmless when 

the plaintiff did not object to a special 

verdict form which required the jury to 

decide the case on negligence alone. 

Given a jury instruction on strict liability in tort, no matter how incomplete, 

would not have cured counsel's failure to 

offer a verdict form which would. have 

allowed a jury to consider strict liability in tort. 

In the Rleinsasser case, I voted with the majority to 

affirm a verdict in favor of defendant because only the 

negligence theory was submitted to the jury on a special 

verdict form. In this case, only constructive fraud and 

fraud were submitted in the special verdict form and the jury 

found in favor of the plaintiff on these theories. No mention was made of the implied covenant of good faith and fair 

dealing and it could not be prejudicial error to have given 
an incomplete instruction defining a tort which was not 

submitted to the jury. 

The bottom line is that in Kleinsasser, the majority 

wished to affirm the defense verdict and so properly relied 

upon the fact that the incomplete instruction was not prejudicial because the verdict form only considered negligence. 

Since the majority was right in its application of legal 

principles, I voted. with the majority opinion although I 

personally disagreed with the jury verdict finding in favor 

of the defendant. 

Now we have a case where the jury has found in favor of 

the plaintiff and the majority wishes to reverse the verdict. 

The majority reverses on an instruction which the majority 

erroneously finds to be incomplete. However, assuming arguendo that the instruction is incomplete, well established 

legal principles, affirmed and applied in Kleinsasser, dictate a finding by this Court that any incompleteness could 

not have infiltrated a jury verdict based upon constructive 

fraud or fraud. 

This Court continues to apply whatever legal principles 

are desired to achieve the necessary result. Again, the 

people of this State and the practicing members of the trial 

bar are left with a revolving door approach to the resolution